Finance minister Patrick Chinamasa’s bold and pragmatic reform proposals to contain runaway government spending require political will to sail through, analysts have said.
BY NDAMU SANDU
In his mid-term fiscal policy review last week, Chinamasa proposed a raft of reforms that include cutting 25 000 government jobs, cutting salaries for senior civil servants and to suspend bonuses for at least two years. The aim is to cut the growing recurrent expenditure which has left Treasury with virtually no fiscal space.
Chinamasa revealed the shocking statistic that the government wage bill was now gobbling a whopping 96,8% of total revenue and that government had resorted to borrowing from the domestic market to finance the yawning revenue gap.
While cautiously hailing the reforms, economists said the reforms required one key ingredient — political will — which was easily elusive, especially as the country hurtles towards the watershed 2018 elections.
“It may not be politically feasible to do that. It also depends on how the [labour] unions will take it [job cuts]. If there is a backlash, he [Chinamasa] may be forced to review the reforms,” said Prosper Chitambara, a senior researcher with the Labour and Economic Development Research Institute of Zimbabwe.
The ruling Zanu PF retained power in the 2013 elections on the back of a manifesto that promised heaven on earth, including the creation of 2,2 million jobs by 2018. Statistics from the Zimbabwe Congress of Trade Unions however show that 229 companies closed in the first half of this year alone, throwing thousands of workers onto the streets. They joined over 20 000 others that lost their jobs following last year’s Supreme Court ruling that legalised retrenchment on three months’ notice.
This has raised fears that government will struggle to effect the retrenchment route as it has to balance political interests ahead of the 2018 elections. Populism has been Zanu PF’s trump card in the run up to key elections. In 2013, government ordered local authorities to cancel debts owed by residents and the impact continues to be felt today, three years on.
Last year, Chinamasa proposed a bonus freeze for 2015 and 2016 because of a tough economic environment but President Robert Mugabe overturned Chinamasa’s decision and lambasted him saying he had consulted nobody on this decision, including him and his two vice-presidents. On Mugabe’s orders, treasury struggled to pay the bonuses and only completed the task last month.
Chitambara said the reforms needed to be interpreted in relation to the re-engagement efforts with international financial institutions.
Zimbabwe is struggling to mobilise resources to clear the combined $1,8 billion debt to the three preferred creditors — the World Bank, International Monetary Fund and the African Development Bank.
Chinamasa said due to revenue under-performance and huge government expenditure, a cumulative budget deficit of $623,2 million was recorded in the first half of the year.
The 2016 budget had projected a budget deficit of $150 million which was to be financed through borrowing from the domestic market.
“Failure to contain the budget deficit in the shortest possible time will worsen the deficit to an estimated year-end level of over $1 billion,” Chinamasa said.
He said the lack of capacity to service domestic debt had also seen roll-overs, which posed financial risks on domestic debt instrument holders and domestic financial institutions.
“This situation, unfortunately, is not tenable and is undermining the stability of the financial sector and overall economy,” he warned, adding that domestic borrowing was crowding out lending to the private sector and hence “stifling new domestic investment and growth”.
Government has been financing the deficit through the issuance of Treasury Bills (TBs) by the central bank. Banks see TBs as safer than lending to companies. However, this is not good for the overall health of the economy as the money used to buy TBs should have been advanced to assist businesses.
An economist with a leading commercial bank said government’s runaway expenditure was alarming considering that the economy had not seriously underperformed, with some sub-sectors having performed better than last year.
In the first half of the year, the Zimbabwe Revenue Authority collected $1,65 billion against a target of $1,75 billion, which was not very much off target.
“Why should we be in dire straits when pockets of the economy performed better than last year? We have been reckless in the way we handled our expenses,” the economist said.
“We should be able to cut our coat according to the size of the cloth.”
In the era of the inclusive government, Treasury adopted a cash budgeting system where then Finance minister Tendai Biti adopted the “eat what we gather” approach, a move which stemmed reckless expenditures which is blamed for the world record pre-2009 hyperinflation.
Economist Brains Muchemwa told Standardbusiness that prudent fiscal management was at the core of macro-economic stability, without which serious downside risks were vented into the wider economy and financial markets.
He said the budget deficit for the first half of the year was staggering and its financing had no doubt strained the market from a number of perspectives, probably the reason why there “is the Damascus moment on policy consensus and convergence with regard reforming the civil service wage bill”.
“The civil service to population ratio in Zimbabwe at around 1:40 is among the lowest and most inefficient in the world, moreso when compared to peers such as South Africa where the ratio stands around 1:116,” he said.
“And minister Chinamasa, just as he did in 2009 when he dollarised the economy after an unprecedented run of hyperinflation, stands at the crossroads again and has to administer unpopular raft of measures to stem deflation and weak economic growth.”